Wednesday, January 24, 2018

Steely Dan: Can't Buy/Sell a Thrill

In my last blog post, I wrote about the sad developments
which led to Donald Everly being in litigation with the Estate of his late
brother Phil Everly.No less depressing
is the recent California lawsuit:Steely Dan, Inc. and Donald Fagen v. the
Estate of Walter Becker.This case
filed in November 2017 is interesting because it shows the complex
interworkings of corporate law, probate law and band dynamics.

All musical groups function as a business entity and music
lawyers are always trying to get their clients to recognize this and take steps
to organize themselves properly, be it as a partnership, corporation or limited
liability company.Apparently the
original members of Steely Dan recognized this back in 1972 when they signed
their first record contract.At that
time they formed a corporation, Steely Dan, Inc. with five shareholders (Fagan,
Becker, James Hodder, Dennis Dias and Jeff Baxter).The individual shareholders also entered into
a Buy/Sell agreement which provided that upon the death or termination of the
corporation's employment of a shareholder, the corporation would be entitled to
purchase that shareholder's shares of stock in the corporation at book value
(as opposed to fair market value)/The
Buy/Sell agreement is a widely used tool in closely-held business corporations
used to maintain control amongst the original shareholders and avoid outsiders
becoming shareholders. It allows the original shareholders the ability to
purchase the interests from the estate of a deceased or terminated shareholder
so that the business can continue without having to necessarily deal with
relatives of former members.The
Buy/Sell agreement is a widely used tool for musical groups because it lays out
a procedure to follow when a band member quits the band.Departures can be contentious and it is
helpful to have a procedure in place to navigate the split.Clearly the Steely Dan Buy/Sell agreement was
fairly successful in that it stayed in place for 45 years and weathered
all of the various personnel changes resulting in Becker and Fagen being the only remaining
original members.But few groups become
as successful as Steely Dan.The graver
issue (but one which will sadly become more commonplace) is that more and more
band members of these iconic bands of the 1960s and 1970s will die – triggering
various corporate mechanisms designed to protect the entities but not
necessarily designed to deal with dead rock stars and their estates.

Daniel Scott, writing
in Forbes pointed out the problems
with using the traditional corporate devices to deal with the unique situations
of musical groups and their "legacy plans".He states:

While this may work for more
traditional businesses, Buy/Sell agreements do not work well in a band
setting.First there is the issue of
value.Ordinarily a Buy/Sell agreement
applies a formula to determine the fair market value of the deceased owner's
interests.The problem is, valuing what
a band is worth is hardly a science and has been the subject of much debate in
recent years, particularly when it comes to the value of rights such as
likeness and image (as opposed to just sound recordings and publishing.)This could result in a significant
undervaluing of the deceased member's interests.

Purely as an equitablematter,it would seem that Becker’s estatewould be entitled to something for the 45 years of work he put into the
band (that is, in addition to record royalties and publishing royalties which
we assume are not part of this agreement. On the otherhand, there was and is a good reason to
create these kind of documents to deal with the mercurial natures of rock and
roll bands.

I doubt that this case will go all the way to trial but I
bet that one major result of the dispute will be to cause those who advise musical
groups, especially those with long track records, to reevaluate their governing
documents.